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MANAGING INTEREST RATE RISK: DURATION GAP AND MARKET VALUE OF EQUITY - page 12 / 39

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Two types of interest rate risk

Reinvestment rate risk

... the risk that a bank can not reinvest cash flows from assets or refinance rolled over or new liabilities at a certain rate in the future

Cost of funds versus the return on assets

Funding GAP, impact on NII

Price Risk

… changes in interest rates will also cause a change in the value (price) of assets and liabilities

Longer maturity (duration)

larger change in value for a given change in interest rates

Duration GAP, impact on market value of equity

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